Another day, another sharply volatile markets.
US equity markets made another spectacular comeback.
The actions of the US S&P exhibits the amazing turnaround today. Down by over 2%, the major US bellwether hit the bear market threshold then sharply recovered during the last hour to make a dramatic 4.1% swing as shown in the above chart from stockcharts.com.
The reported trigger: another bank bailout in the Eurozone.
This from Bloomberg (bold emphasis mine)
U.S. stocks rallied, driving the Standard & Poor’s 500 Index up 4.1 percent in the final 50 minutes, amid speculation European Union officials are examining how to recapitalize the region’s banks. Treasuries fell and the euro rallied.
The S&P 500 surged 2.3 percent to 1,123.95 at 4 p.m. New York time, sparing the benchmark measure of U.S. equities its first bear market, or 20 percent retreat from a peak, since 2009. Yields on Treasury 10-year notes climbed 6 basis points to 1.82 percent. The euro appreciated 1.1 percent to $1.3322. Futures on Germany’s DAX Index pared their loss to 1 percent from 4.9 percent.
Equities rebounded after the S&P 500 fell below 1,090.89, the closing level required to give the index a 20 percent slump from the three-year high reached on April 29. Stocks rose after the Financial Times quoted Olli Rehn, European commissioner for economic affairs, as saying there is an “increasingly shared view” that the region needs a coordinated approach to halt the sovereign debt crisis. After U.S. markets closed, Belgian Prime Minister Yves Leterme said a “bad bank” to hold Dexia SA (DEXB)’s troubled assets will be set up.
It is important to note that US municipal bond markets (state, cities and etc.) has significant but dwindling exposure to Dexia, from previously $54 billion to the current $9.6 billion (Reuters). Thus, the reported bailout sent US financial stocks leading the way for the fiery rally in the broader equity markets.
To add, the US Federal Reserve has a big loan exposure on Dexia in 2008, which most likely postulates that the Fed will be part of the rescue package.
From the telegraph
At the height of the financial meltdown, on October 24, 2008, Dexia's New York branch was used to borrow $31.5bn (£19.6bn). The total borrowing from all banks during that week climbed to $111bn, according to lending data released by the central bank on Thursday.
This serves as another evidence manifesting how financial markets have become deeply dependent on government bailout or steroids.
Importantly, that the heightened volatility in the markets have been due to the whack a mole strategy applied by policymakers on bank rescues. Remember, this is just one of the many banks that would 'require' bailouts.
Lastly, the exposure by the US Federal Reserve and US banks to Europe’s imploding banking system only means that team Bernanke will be reengaged in his helicopter option soon
